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Big Pharma's Response to R&D Woes: More Early-Stage Compound Deals

Executive Summary

The earnest tone of the discussions at this year's Pharmaceutical Strategic Alliances Conference reflected an increasingly common assumption among industry executives and insiders: the drug industry's growth problem isn't a merely cyclical issue. Declining productivity, a problem evident in biotech companies as well as Big Pharma, is to blame. Industry executives provided mixed opinions on how to best tackle this challenge, but both Pfizer and Bristol-Myers Squibb suggested a trend towards early-stage compound licensing.

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Why Deal Accounting Matters

The pharmaceutical industry is well past the time when licensing was seen as merely a supplement to the internal R&D program. Now, it often plays a more important role than the company's internal R&D. As dealmaking becomes a bigger part of the overall pipeline building program, investors will require greater clarity from companies who now can bury external dealmaking costs in one-time write-offs or aggregated clash flow numbers.

Why Deal Accounting Matters

The pharmaceutical industry is well past the time when licensing was seen as merely a supplement to the internal R&D program. Now, it often plays a more important role than the company's internal R&D. As dealmaking becomes a bigger part of the overall pipeline building program, investors will require greater clarity from companies who now can bury external dealmaking costs in one-time write-offs or aggregated clash flow numbers.

Testing Drugs Against New Targets: Like Playing Blind Man's Bluff?

As companies move into development of drugs against novel targets, including a host of genomically derived drugs, they are assuming a new kind of target risk. The heightened risk exists largely because the targets revealed by genomics techniques for the most part have not been validated by linking them empirically to the initiation or maintenance of a disease state, nor through the use of biomarkers during clinical development. Stumbles in the pursuit of drugs against EGFR are symptomatic of this new pharma industry problem. In this context, the cancer drugs Herceptin and Gleevec, widely touted as the first examples of rapidly developed, rationally designed molecular medicines, will prove to be much more the exception than the rule. And importantly, the emerging pattern of EGFR drug development suggests that pursuit of novel targets will do little to ameliorate the industry's R&D productivity problem.

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